Wednesday, May 26, 2010

A Voice of Realism on the Invisible Hand no. 1

‘We argue further that Smith’s reference to the invisible hand and market prices gravitating to the natural prices does no imply some unusual causal laws which are waiting to be discovered by economists. When Smith uses the expression he speaks metaphorically in order to suggest that free commerce is well ordered because of the social value patterns in which the actors are committed. As participants in market economics, people are so familiar with the rules of the process that their freedom of action itself reflects these rules, giving them the appearance of causal laws. Hence, real market prices continuously move up and down as if they are gravitating towards some average which the actors recognise as the normal or natural value’ (p. xi).

‘Chapter IV The Invisible Hand and Mutual Sympathy’ (114-56).

‘Where does the modern version of the theory [General Equilibrium] leave the invisible hand? … On the one hand there is good news: the intuitions of Adam Smith and many later [economists?] can indeed be vigorously formulated and proved. The bad news is that the theorems depend on a host of conditions, many of dubious realism … The modern version might be taken to refute, not to support, the applicability of visible hand propositions to real-world economies’ (p. 115).

CommentThis is a new, though comparatively thin, series (unless readers know of more examples – hint, hint). Like the example of Jan Peil (disclosure: I have no knowledge of him or his work – other than reading his book), I occasionally come across such writings, which I would class as the early heroes of those who tell us that the ‘emperor is naked’ when they look closely at what the ‘emperors’ tell us.

It should be noted that the linking of Smith’s use of the metaphor of the Invisible Hand to General Equilibrium theory arose from the earlier linking of the metaphor to ‘perfect competition’ in the 1940s.

Paul Samuelson passed this idea on in his 1948 edition of his splendid undergraduate text, Economics: an introductory analysis, McGraw-Hill, 1948, from the oral tradition in the 1920s and 1930s at the University of Chicago, from which he graduated in 1935.